Aerospace & Defense Update

Intended to replace the Hellfire missile, a Joint Air-to-Ground Missile (“JAGM”) was successfully fired from a Gray Eagle unmanned aircraft system and hit its target, a truck traveling at twenty miles per hour.  According to the U.S. Army’s Joint Attack Munition Systems project manager, this is the first time the JAGM missile has been tested on a drone.  Compared to the Hellfire missile, the JAGM missile is not highly dependent on operator skill or latency of the Predator platform.  The missile is currently being developed under Lockheed Martin’s $66 million contract for JAGM missile engineering and manufacturing development with two $60 million options for initial production.

Britain is in the initial stages of creating a new era of space-based tactical communications for its military that will replace the current Airbus Skynet 5 system scheduled to end in 2022.  The Future Beyond Line of Sight (“FBLOS”) program would replace the Ministry of Defense’s (“MoD”) current twenty-year deal with Airbus Defence and Space started in 2003 to provide and support satellite, ground terminals, and control rooms.  The world’s largest satellite builders and service providers, including Airbus, Boeing, and Lockheed Martin, have expressed interest in the upcoming contract, which will likely have several awardees.  Executives competing over the contract believe many new technologies such as solar-powered UAVs and data transmission by laser will emerge over the next decade, thus emphasizing the need for further innovation.

Government Technology Solutions Update

According to officials from the Center for Medicare and Medicaid Services (“CMS”), big data and predictive analytics tools used to fight Medicare fraud have saved taxpayers approximately $1.5 billion dollars over the past five years.  These tools are part of CMS’ Fraud Prevention System (“FPS”), which the agency began using in June of 2011 and runs sophisticated analytics for approximately 4.5 million daily Medicare claims.  FPS’ applications allow CMS to go “beyond the reactive ‘pay and chase’ approach toward a more effective, proactive strategy that aims to prevent these illegitimate payments in the first place,” explained CMS officials.  It is estimated that in 2015, CMS saw a return of $11.60 on every dollar invested in FPS, and as a result is currently working to develop next-generation predictive analytics to further improve the efficiency of mission-critical system.

In an effort to diminish cybersecurity risks within its internal computer systems, Department of Defense (“DoD”) CIO Terry Halvorsen laid out the agency’s new “Cybersecurity Discipline Implementation Plan.”  The comprehensive plan highlights four courses of action and includes the use of a new scorecard to ensure that the DoD is adequately strengthening its cybersecurity defenses.  Each course of action pertains to a unique area of cybersecurity that hackers have exploited to gain access to the agency’s network.  The Defense Readiness Reporting System, another component of the plan, enables supervisors to report their status on meeting these requirements and allows “leadership to review compliance down to a tactical level,” the plan explains.

Big Movers

Zodiac Aerospace (Up 7.3%) – Shares were up this week as the Company reported new business from United Airlines’ upgraded business class seats.

Cobham (Down 16.0%) – Shares declined after the defense group announced a $700m rights issue that allows its investors to purchase shares at a significant discount of 45% to the closing price in order to raise capital to pay off debt.

Transactions

Aerostar Aerospace Manufacturing, LLC acquired Warmelin Precision Products, a provider of highly complex precision components for the global aerospace industry.  Terms of the deal were not disclosed.

Genstar Capital, LLC acquired Infinite RF Holdings, Inc., a provider of engineering grade radio frequency (RF) technology components to the aerospace/defense, industrial, government, consumer electronics, instrumentation, education/medical, and telecommunications markets.  Terms of the deal were not disclosed.

Saint Gobain Performance Plastics Corporation acquired MIPNET Industries, a provider of composite parts designed with the RT2i^TM weaving technology to aerospace industry. Terms of the deal were not disclosed.

United Flexible, Inc. to acquire Kreisler Manufacturing Corp., a provider of precision metal components and assemblies primarily for use in military and commercial aircraft engines, and industrial gas turbines in the United States.  The deal is worth an estimated $35 million.

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Aerospace & Defense Update

The U.S. House of Representatives approved a $582 billion Pentagon budget that shifts major funds to a list of major weapons programs including the F/A-18, F-35, and Army rotorcraft.  The new bill plans to reallocate $18 billion in wartime overseas contingency operations (“OCO”) funding toward base budget requirements, and adds more troops, jet aircraft, shipbuilding, and rotorcraft.  The White House has expressed its opposition to numerous provisions in the bill and the President said he will likely veto the legislation in its current form, as it would drive OCO funding to run out by next April, forcing the next president to seek supplemental funding from Congress.

Congressional restrictions on the use of Russian rocket engines may threaten the financial viability of U.S. civil space programs.  Industry officials project these potential restrictions could increase NASA’s launch costs by hundreds of millions of dollars in future years.  If the supply of Russian-built technology is cut off for Pentagon missions, the annual number of Atlas V launches would drop sharply, likely raising the price of remaining National Aeronautics and Space Administration (“NASA”) missions due to the massive overhead costs that would be spread across fewer launches.  Currently, the anticipated increases in costs pose major challenges for top priority NASA programs, such as unmanned missions for deep-space exploration and cargo transportation to the international space station.  Despite these concerns, senior NASA officials expressed support for Congressional efforts to phase out Russian engines and remain confident in finding a viable U.S. replacement.

Government Technology Solutions Update

The House Committee on Oversight and Government reform released its Federal Information Technology Acquisition Reform Act (“FITARA”) May scorecard for Federal agencies this week.  The Committee scored 24 agencies on a set of metrics to determine an overall grade between “A” and “F.”  As compared to the November scorecard, seven agencies improved, one (The General Services Administration’s score) declined, and 16 remained consistent.  The Department of Commerce received the best overall score of a “B,” with high marks on risk assessment transparency and data center consolidation.  11 agencies received a “D” grade, which is the lowest possible score.

The U.S. Navy is beginning preparations to replace the IT systems and infrastructure that support shipyard and ship maintenance.  The joint project between the Space and Naval Warfare Systems Command and the Naval Sea Systems Command will replace more than 100 systems and applications, some of which are more than 50 years old.  Bruce Urbon, the program manager for the Navy Maritime Maintenance Enterprise Solution – Technical Refresh (“NMMES-TR”), stated “We have systems that are that old that we’re still using to maintain our fleet…It’s a growing concern within the Navy that these systems are going to fail, and that’s going to have an impact on fleet readiness and getting ships ready to deploy.”  The Navy has already held one industry day, and is looking to hold more in preparation for the systems updates.

Big Movers

Booz Allen Hamilton (Up 6.7%) – Shares were up this week after the company reported a backlog that reached a record high for the end of its fiscal year and increased revenue and profit in its latest quarter

Babcock International (Up 4.1%) – Shares were up this week after the company was awarded a contract, estimated at $580 million, by the U.K’s Ministry of Defense to deliver the rotary wing element of the U.K military flight training system

Transactions

Advanced Logistics for Aerospace (“ALA”) to acquire STAG Group, a provider of distribution and supply chain services for the aerospace industry.  Terms of the deal were not disclosed.

AE Industrial Partners acquired AC&A, a provider of composites, metallic parts, and tooling.  Terms of the deal were not disclosed.

Kalex Corp. acquired Herndon Aerospace & Defense Company, a distributer of commercial and defense supply chain management solutions.  The deal is worth an estimated $21.0 million.

KEYW announced the sale of its Hexis Cyber Solutions HawkEye AP product line to Ignite Anlytics, and its Hexis Cyber Solutions HawkEye G product line to an undisclosed private-equity backed strategic player.  HawkEye AP provides data analytics and HawkEye G provides endpoint detection and responses. Terms of the deals were not disclosed.

Magellan Health Inc. acquired Armed Services Corporation (“AFSC”), a provider of behavioral health and specialty services, such as business strategy, management consulting, and HR solutions, to various agencies of the Federal government.  The deal is worth $127.5 million.

National Technical Systems acquired Chesapeake Testing Services, a provider of ballistic experimentation, non-destructive, sports, environmental simulation, and X-ray computed tomography scanning testing services.  Terms of the deal were not disclosed.

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Aerospace & Defense Update

The prototype rotorcraft vying to replace the Army’s Black Hawk is scheduled to take its first flight in 2017.  The prototypes are being developed for the Army’s Joint Multi-Role Technology Demonstrator project, commissioned in 2013 after considering various new technologies, by a Sikorsky and Boeing team and Bell Helicopter.  The project will be a part of the Army’s Future Vertical Lift program, a vast effort to replace all helicopters, which include the AH-64 Apache, CH-47 Chinook, and the OH-58.  In order to meet the Army’s shifting needs the rotorcraft will be designed to fly higher, faster, and farther with increased cargo capacity.  Sikorsky and Boeing are currently building the SB-1 Defiant, a high-speed coaxial helicopter, and Bell is building the V-280 Valor, a tiltrotor aircraft.  Both are slated for their first flights in the latter half of 2017 with first orders from the army expected in 2030.

The Association for Unmanned Vehicles Systems International (“AUVSI”) hosted XPONENTIAL 2016 in New Orleans, with more than 8,000 industry leaders and professionals from over 55 countries in attendance to discuss the latest innovations in the unmanned systems market.  The conference, which acts as a platform for providing information about the future of unmanned systems policy, regulations, and technology, featured an announcement from Federal Aviation Administration (“FAA”) Administrator Michael Huerta regarding a new drone advisory committee to be chaired by Intel CEO Brian Krzanich.  As a first step towards easing regulation, the FAA will allow students to operate unmanned aerial systems.  The drone advisory committee anticipates the measure to spur innovation, with the ultimate goal of positioning the U.S. as a leader in the marketplace.  The committee also plans to help identify and prioritize integration challenges and improvements.

Government Technology Solutions Update

Information security incidents at Federal agencies experienced double digit growth in 2015, despite agencies taking increased measures to better protect networks, according to the FY2015 Office of Management and Budget’s (“OMB”) report to Congress on information security.  A total of 77,200 incidents were reported in 2015, up from 69,900 reported in 2014.  While cyber attack incidents still grew at double digit levels in 2015, the growth was less than any other year since 2003.  External scans, probes, and attempted access accounted for the majority of incidents, followed closely by insider threats, such as policy violations and equipment loss.  The sheer number of reported incidents, as well as the continuation of significant year-over-year growth, reinforces the growing need for more effective network monitoring and automated security tools to better prevent and address threats.

Federal Agencies are attempting to minimize the lag between when they receive data and when they analyze data by more effectively using big data analytic methods.  Agencies have sought to increase the manpower at their disposal through analysis training programs, but the amount of data limits the effect of increased manpower.  By reaching out to industry partners, agencies have been slowly decreasing this data analysis lag.  The Department of Homeland Security (“DHS”) has decreased its analytical backlog to around one month, while Centers for Medicare and Medicaid Services (“CMS”) has decreased its lag time from one year to three months by utilizing real-time analysis techniques.  In order to better utilize the sheer amount of data at their disposal, agencies are looking for creative solutions from industry partners while increasing the cyber manpower available within the Federal government, a trend that will likely continue over the near term.

Big Movers

Kratos Defense & Security Solutions (Down 19.4%) – Shares were down this week after the company reported weak earnings for the first quarter

Tutor Perini (Up 22.9%) – Shares were up this week after the company reported increased project opportunities in its earnings report

Transactions

Altamira Technologies Corp acquired Prime Solutions LLC, a provider of engineering and information technology services.  Terms of the deal were not disclosed.

Convergint Technologies, LLC. acquired Total Recall Corporation, a provider of citywide surveillance networks.  Terms of the deal were not disclosed.

DLH Holdings Corp acquired Danya International, Inc., a provider of evidence-based health, education, and food security technology-enabled solutions.  The transaction was valued at $38.8 million.  KippsDeSanto & Co. acted as the exclusive financial advisor to Danya International, Inc.

Fortem Technologies acquired the Detect and Avoid Radar Technology Line of IMSAR, LLC., a provider of collision avoidance radar for UAS.  Terms of the deal were not disclosed

FTG Circuits, Inc., to acquire the Printed Circuit Technology Business of Teledyne Technologies, a provider of rigid-flex printed circuit boards and assemblies.  The deal is worth an estimated $9.3 million.

PEI-Genesis, Inc. acquired Filconn, Inc., a provider of filtered, electromagnetic pulse suppression, and custom configuration connectors.  Terms of the deal were not disclosed

Silverfleet Capital to acquire Sigma Precision Components Ltd., a provider of precision components for aerospace and high technology markets.  The deal is worth an estimated $91.2 million.

UES International Pty Ltd., acquired Panther Engineering, Inc., a provider of design, engineering, and high precision CNC parts, tooling, dyes, and molds.  Terms of the deal were not disclosed.

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Aerospace & Defense Update

Airbus’s space unit and partner OneWeb are expected to announce plans for a new Florida factory capable of producing small, advanced communications satellites at an unparalleled rate.  The joint venture will build the highly automated facility designed to assemble and test as many as 15 satellites in a week with production currently slated to begin sometime next year.  The joint venture, financed by Airbus, chip maker Qualcomm, and Virgin Galactic, hopes to assemble and launch more than 640 satellites to provide internet access in developing regions by the end of 2019.  The first prototypes are now undergoing testing by Airbus in France and are scheduled to go into orbit early next year.

The House Armed Services Seapower and Projection Forces Subcommittee urged the Air Force to buy as many as 200 next-generation B-21 bombers in its markup of the 2017 defense policy bill.  Both top military officials and consultants outside the Pentagon have recommended the Air Force acquire more than the 100 planned Northrop bombers in order to ensure enough aircraft are available to meet combatant commander requirements and counter growing threats around the world.  The legislation would direct the secretary of the Air Force to submit a report to the congressional defense committees by February 2017, with an estimate of the number of B-21s necessary to meet security demands.  The report also requires a transition plan to integrate the B-21 into the current bomber fleet until 2040.

Government Technology Solutions Update

The Department of Defense (“DoD”) is currently collaborating with its allies across the globe to integrate common commercial IT platforms, systems, and standards with the aim of improving their warfare capabilities in cyberspace.  According to DoD CIO Terry Halvorsen, the goal is to share IT commonalities across the board with its European allies within the next three to five years.  The integrated systems have the potential to greatly augment information sharing in an increasingly digital age and would also provide significant opportunities to leverage commercially-available solutions.  In response to the recent decision by DoD that requires all agencies and military branches to transition to Windows 10 by January 31, 2017, and a similar mandate by the U.K.’s Ministry of Defense to transition all branches to Microsoft’s Azure cloud, Halvorsen has pressed other allies to follow suit in developing a common Windows 10 baseline.  A common system would not only improve communication and information sharing, but would also facilitate the instantaneous exchange of data at much lower costs.

Nearly a year ago, the Department of Homeland Security (“DHS”) required agencies to fix all critical cybersecurity vulnerabilities within one month.  However, 39 of the more than 360 original issues still remain unresolved.  Part of the problem is that some agencies are running on antiquated, legacy IT systems, which are considered to have significant critical vulnerabilities but can be incredibly expensive to update, especially for smaller agencies with limited resources.  The inability of Federal agencies to address critical security concerns became very apparent following the Juniper software hack incident, which affected 12 agencies, three of which (the Treasury, NASA, and the Department of Commerce) were unable to properly install the security patch to their systems for more than 50 days following the incident.  The concern is that in many cases agencies use complex systems containing multiple outdated, legacy components that may not be compatible with various security fixes, leaving entire systems vulnerable to cyber-attacks.

Big Movers

Zodiac Aerospace (Up 17.3%) – Shares were up this week in response to a potential acquisition offer from Safran SA

Macdonald Dettwiler & Associates (Up 7.0%) – Shares were up this week after analysts boosted the Company’s 1Q16 earnings estimates

Transactions

Reiser Simulation and Training GmbH acquired Innovative Control Systems, Inc., a provider of avionics, test systems, and custom engineering services for the aerospace industry.  The terms of the deal were not disclosed.

Smiths Group plc to acquire Morpho Detection, Inc., a provider of detection systems for explosives, narcotics, and chemical, biological, radiological, and nuclear material.  The deal is worth an estimated $710 million.

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Aerospace & Defense Update

The aviation maintenance, repair, and overhaul (“MRO”) industry converged in Dallas, TX this week for Aviation Week’s MRO Americas, the industry’s largest trade show dedicated to MRO.  Roughly 13,000 people attended the conference including corporate executives, industry analysts, and media personnel.  During the conference, ICF VP, Kevin Michaels, noted consolidation is likely to continue affecting the aftermarket primarily among mid-tier companies building scale around technology.  Beyond consolidation, industry professionals expressed varied views on the future of the MRO market, with some suggesting a potential downturn based on oversold airframe order backlog, unnaturally low interest rates, and a shortage of financing for used aircraft and exchange rates.  Others, however, voiced that aircraft aftermarket activity is trending upwards due to higher levels of aircraft utilization coupled with low fuel prices.

Though Pentagon officials, industry executives, and international leaders agree the foreign military sales (“FMS”) process needs to be improved, Congressional sources and industry analysts believe reform is unlikely before the end of this presidential term.  Change is not expected within the next ten months based on the complex and sensitive nature of weapon sales and a myriad of other factors including the upcoming election, a compacted congressional calendar, and gridlock on Capitol Hill.  Among the most vocal about changing the process is Secretary of the Air Force Deborah Lee James, who aims to make it easier for those fighting against the Islamic State to receive weapons quickly and efficiently.  While there seems to be little chance for reform this year, reforms for better prioritization and synchronization among agencies within international defense is expected to reignite after a new president enters office.

Government Technology Solutions Update

Earlier this week, the General Service Administration (“GSA”) Office of Integrated Technology Services released the pre-solicitation for the Veterans Technology Services 2 (“VETS 2”) contract, the $5 billion successor to its government-wide VETS contract established in 2007.   Similar to its successor, VETS 2 will have a five-year base period of performance with a five-year optional extension and the same $5 billion ceiling value.   VETS 2 will serve as a general contract for a number of federal agencies to purchase a wide-range of IT services.  Also consistent with its predecessor contract, only service-disabled, veteran-owned small businesses (“SDVOSB”) will be able to compete for a spot on the contract.  The actual solicitation is expected to be released on April 21st, with awards expected in 2017.

The GSA recently unveiled its “Making it Easier” initiative focused on providing the tools necessary for helping vendors and start-ups gain more comfort with the Federal contracting process on IT Schedule 70.  This push to bolster efficiency and accessibility of the agency’s largest contract vehicle reflects similar moves at the Department of Defense (“DoD”) and Department of Homeland Security (“DHS”), which have both launched efforts in Silicon Valley to familiarize start-ups with their procurement processes.  In addition to increasing agencies’ and vendors’ awareness and familiarity with federal contracting nuances, the GSA program is designed to streamline the contracting acquisition process, reducing what once took an average of 110 days for various procurement efforts down to 45.  Approximately 80% of the agency’s Multiple Award Schedules (“MAS”) contractors are small companies, yet, they represent only 36% of the roughly $40 billion that flows through the schedules annually.  According to GSA Administrator Denise Turner Roth, the changes are expected to spread across the agency’s other MAS contracts within a month.

Big Movers

CPI Aerostructures (Down 6.5%) – Shares were down this week after the company’s earnings results fell short of analyst expectations

Smith & Wesson (Down 16.1%) – Shares were down this week after analysts downgraded the stock due to FBI figures detailing increased background checks in the month of March

Transactions

Aero Precision, Inc. acquired Fall Machining Company, Inc., a provider of precision machined products for aerospace and other markets.  The terms of the deal were not disclosed.

Alaska Air Group, Inc. to acquire Virgin America, Inc., a provider of scheduled air travel services.  The deal is worth an estimated $2.6 billion.

Hartzell Engine Technologies, LLC acquired the Aircraft Starters and Solenoids product line of Sky-Tec Partners, a provider of complete line of starters for Lycoming and Continental engines.  The terms of the deal were not disclosed.

MB Aerospace Holdings to acquire Centrax Turbine Components Ltd., a provider of compressor and turbine aerofoil, discs, shafts, and casings.  The terms of the deal were not disclosed.

Molex, Inc. acquired Interconnect Systems, Inc., a provider of high density silicon packaging with advanced interconnect technologies for OEMs. The terms of the deal were not disclosed.

Novaria Holdings, LLC to acquire Elastic Stop Nut Corporation of America, a provider of nylon inserts and metal fasteners to the commercial aerospace, military ground, and navy nuclear markets. The terms of the deal were not disclosed.

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